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Savings from an Early Home Loan Payoff

Paying off a home mortgage early could be a smart decision for many borrowers. It can save thousands of dollars in interest and gives more opportunity for financial freedom. Homeowners may choose to save the extra money, make investments or put it into retirement plans.

There are several reasons to consider paying off a mortgage early. For instance, the interest saved on a 30-year mortgage for a $120,000 home could easily be $170,000! Without that monthly payment, there would be an increase in monthly cash flow – money that could then be used in an investment or deposited into a savings account. Just the peace of mind that comes from owning a home free and clear – not owing anyone anything is priceless!

If paying off a mortgage early is a goal – continue reading to learn how it can be accomplished.

How to Pay Down Your Mortgage Early

Adding Extra Each Month

Simply paying a little more towards the principal each month will allow the borrower to pay off the mortgage early. Just paying an additional $100 per month towards the principal of the mortgage reduces the number of months of the payments. A 30 year mortgage (360 months) can be reduced to about 24 years (279 months) – this represents a savings of 6 years! There are several ways to find that extra $100 per month – taking on a part time job, cutting back on eating out, giving up that extra cup of coffee each day, or perhaps some other unique plan. Consider the possibilities; it may be surprising how easily this can be accomplished.

Automated Bi-weekly Payments

Still think you don’t have an extra $100 per month to pay on the principle? Some banks are offering to set up automatic payments. They will take a payment for half of your regular mortgage payment, from your checking account every other week and apply it to the mortgage payment. Because some months have five weeks, in one year, regular bi-weekly payments end up making an extra payment – thirteen payments instead of twelve. For banks that do not have this service, there are third party companies that will process the payment (we don't recommend them - and highlight why in the cautionary notes below). It is better to set this up directly with the bank or do it yourself rather than using a third party service.

Extra payments may also be made by check. “Apply to Principle” would need to be written in the check memo to insure that the extra money is applied to the principle.

TIP: If you have an automated payment set up with your bank, ensure it is set up to pay every two weeks rather than twice per month. If it only pays twice per month you miss out on that extra 13th annual payment.

Annual Windfalls

Some people get significant sales bonuses, cash gifts on their birthday or during the holiday season, or large tax refunds each year. If you can apply these directly to your mortgage you can shave many years off the loan.

Saving Money by Getting Below PMI Requirements

Mortgage companies require PMI (private mortgage insurance) when the borrower does not have 20% or more for a down payment. It is protection for the lender in case the borrower defaults on the loan. So, if a home was purchased with less than a 20% down payment, the bank is probably charging PMI. However, once the borrower owns 20% of the home, this charge could be eliminated. Some borrowers take out a second mortgage to bypass the PMI requirement.

Some banks may automatically charge for PMI until you loan-to-value (LTV) is at 78%, but you can call them when your loan hits 80% to get PMI charges removed.

Refinance to a Lower Rate

Homeowners can save money by refinancing to a lower rate, or by converting an adjustable rate mortgage into a fixed rate which remains locked for the life of the loan. If you would make higher payments if forced to, but would otherwise struggle to make the higher payments then it may make sense to opt for a 15-year mortgage rather than a 30-year loan. The shorter duration loan will typically have a lower interest rate & since the loan will be paid off faster you'll spend far less on interest. For your convenience, here are current rates in your local area.

One thing to note about refinancing is there are some fixed costs in setting up a new mortgage even for streamlined refinancing. If you will live in your home for many years then locking in a lower rate makes a lot of sense, but if you plan on moving in the next few years it may not be worth the cost of refinancing unless you needed to get cash out or had another reason to set up the new loan. In cases where a homeowner needs a small sum of money a HELOC may be a superior option to refinancing the entire mortgage.

A Couple Cautionary Notes

Losing the Benefits of Interest Deductions

Before deciding to pay off a mortgage early, it would be a good idea to weigh the pros and cons. The interest charged on up to $750,000 of mortgage debt used to purchase a principal residence can be used as a deduction on taxes in the year that it is paid. Because most of the monthly payments in the early years of a loan are interest, this can really add up. The mortgage interest deduction to homeowners is a very popular subsidy. However, the benefit would be lost if the mortgage is paid off early. In years gone by interest paid on home equity loans or HELOCs was tax deductible, but that is no longer the case in 2018, as equity debt is no longer treated like mortgage debt unless it is obtained to build or substantially improve the homeowner's dwelling.

Pre-Payment Penalties

Make sure if you pay extra it is immediately applied toward the principal of the loan. Some banks charge pre-payment penalties for mortgages which are paid off early. If your bank has a steep pre-payment penalty you still can pay the loan down significantly in advance, but leave a small amount remaining on the loan until you get past the date at which the pre-payment penalty no longer exists.

Third Party Bi-weekly Payment Services

For banks that do not have automated payments, there are third party companies that will process the payment. They will charge a start up fee and then a transaction fee for each payment. It is better to set this up directly with the bank or do it yourself rather than using a third party service.

If anything should happen to a third party service (a technical glitch, bankruptcy, etc.) then you the homeowner would still be on the hook for the missing payment.

If you apply what you were paying to the third party service toward your home loan the mortgage would be paid off even quicker.

There are some other third party payment strategies which we don't particularly recommend. An example is highlighted below.

Money Merge Accounts

The pitch:

"Money Merge Accounts can rapidly reduce the principal of the mortgage. They can lower the amount of the interest that accrues on the loan. A 30 year mortgage could be paid off in 1/3 to ½ the time. Without refinancing the existing mortgage or changing the lifestyle of the homeowner."

Here’s how it works:

Deposit the Paycheck: The paycheck is deposited into the current checking/savings account. Once the funds are clear, an amount designated by the homeowner is transferred out of the checking or savings account into the Money Merge Account managed line of credit. This line of credit is connected to the home, so the money transferred out of the checking or savings account decreased the mortgage balance and reduces the balance which builds the interest.

Pay the Bills: During the month, the bills are paid using the Money Merge Account. Through this account, money is available immediately through ATMs, checks and debit cards. Any remaining money left after the payment of bills, remains in the account against the balance of the mortgage until it is needed. So the mortgage balance is kept quite low, which further reduces the mortgage interest charge.

Follow the System: By following the prompting of the online Money Merge Account system offered by the bank will not only allow the maximum in savings but allow the mortgage to be paid off as fast as possible.

The Money Merge Account allows the homeowner to use their income and savings to both reduce the loan balance and minimize the interest payments. That means because more money goes towards the principal balance each month, the mortgage can be paid years earlier and save thousands of dollars in interest. The Money Merge Account can also be used for other debts such as personal loans, overdrafts and credit card balances – which mean less interest on all debts.

Money Merge Accounts are not for everyone.

The products is costly for the financially disciplined family. The price highlighted for the software in this blog post is $3,500.

Putting an extra $3,500 on your mortgage upfront & then setting up bi-weekly payments or other automated extra payments on your own would likely help you pay off your mortgage far quicker. Or you could change a 30-year mortgage to a 15-year mortgage.

While the software sales pitch claims it does not require you to change your lifestyle, $3,500 is a significant sum of money. And if you don't change your lifestyle at all & had troubles overspending and undersaving in the past, then mixing unsecured debt in with secured debt could lead to serious issues. Missing a credit card payment (or a series of them) isn't as scary as missing a similar number of home loan payments.